Banking on potable water as asset class

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Just over two years ago, residents of the lakeside city of Wuxi flooded the city's supermarkets in search of bottled water. A massive blue-green algal bloom outbreak in Wuxi's famed Lake Tai had contaminated tap water supplies for millions of the city's inhabitants, setting off waves of panic buying.

The emergency was blamed on a number of factors, including raw sewerage pumped directly into the lake and the proliferation of polluting industries around the water source.

But the crisis also exemplified the broader industrial and urban pressures on the world's finite supplies of accessible, potable water.

According to Steve Hoffman, author of Planet Water - Investing in the World's Most Valuable Resource, 40 per cent of the world's population already live in water-scarce areas and that proportion is set to rise to 60 per cent if use of the resource continues to rise at its existing rate.

The potentially dire threats to communities are obvious but Hoffman suggests that the worst-case scenarios can be avoided through innovations in technology, finance and institutions. Making those changes in water use will not only present challenges for consumers, suppliers and regulators but also enormous, unprecedented opportunities for intrepid investors as the cost and price of water inevitably rise. Hoffman forecasts that several drivers are poised to push up the real price of water, including the need for hikes in the existing artificially low rates to cover infrastructure demands, the growing incorporation of scarcity into pricing structures and greater use of technology to solve water problems.

Water supply is a highly regulated sector and has traditionally been the province of government and a system that bundles costs together and charges consumers for a single finished product, an approach that Hoffman describes as inadequate and inefficient. As costs rise, municipalities will have greater incentive to make efficiency gains by decentralising and contracting out various elements of provision, thereby opening the door for the non-government sector.

Opportunities exist in the treatment of water and wastewater on the mainland where demand for water treatment chemicals is expected to grow 13 per cent annually. Hoffman advises investors to steer clear of unproven technologies and instead focus more on prospects that can demonstrate market leadership, technical diversity and industry acceptance.

Investors could consider infrastructure as suppliers seek to stem losses from ageing pipe networks. There are opportunities not only in replacing and rehabilitating degraded infrastructure but also in the development of flow metering equipment to detect leaks.

Hoffman argues that while water is not yet a commodity with a market for buying and selling supplies it should be seen as an important asset class as investment options expand.

Planet Water presents a detailed overview of the technical and economic forces at play in the water industry and manages to balance business with ecological concerns.